Near-term factors likely to influence BTC

While not normally providing analysis and outlook on this blog, I thought I’d highlight a few factors that may be influencing Bitcoin in the near term.

The backdrop has been that Bitcoin managed to put in several higher weekly consecutive closes before negative sentiment, jawboning, expressed by influential investors and technical resistance of 10k led to price decline. Going forward, FundStrat’s Tom Lee has highlighted that the crypto conference starts next week which has historically led to significant gains (not verified).

On the bearish side, there are rumors, based on transactions out of wallets, that MT GOX may be starting to liquidate their Bitcoin holdings. In previous cases, these liquidations were correlated with significant declines in Bitcoin of up to 50% (not verified). This is combined with fears of exchange fraud in South Korea. In addition, I felt that NVIDIA reporting less income from mining sales could have been a bearish factor. NVIDIA and AMD guidance may suggest overall trends for crypto prices. It is also possible that in the past, the crypto space was dominated by enthusiast compared to investors and traders today. As such, we may see less importance from enthusiast events. Combine this also with distribution strong hand “whales” and “locked up funds” to smaller investors, suggest potential for new price dynamics with higher risk.

All this must be realized against a price backdrop where another leg down could form from here. Bears could attempt to target the sub 4k level while bulls need to take at least 11k. If we take out ~10k, any non professional traders who acted on general bearish sentiment and jawboning may find themselves in trouble.

While I was bullish on Bitcoin recently, I now see more significant risk. The lowest risk strategy might be to attempt to catch any sort of extreme selling event using far off market limit orders. The more difficult aspect is to imagine how low it may go and whether or not a recovery could hold. On the other hand, if we see sustained buying then it may suggest that the historical bullish bias is playing out. At any rate, the factors in play suggest heightened volatility is likely and that we will move out of recent ranges one way or another.

On the intermediate to longer time scale, FundStrat’s Tom Lee, excellent analysis as always, has also formulated a model that suggest that Bitcoin is likely to be bounded by low and high prices based on production costs. However, there is speculation that if Bitcoin were to fall below the lower bound of such a model that transactions may go unprocessed. I think this is unlikely, provided that the decline was temporary because the miners have an invested interest. On the other hand, if another coin had gained dominant market share, so called “flippening event”, then a combination of sustained prices below production costs would certainly be cause for significant concern. Other fears, such as high transaction costs, have declined for the moment as transaction fees have fallen significantly.

For a longer term analysis, we could also explore this “disaster scenario” for Bitcoin to determine what could be a significant long term bottom. MT GOX distributer is reported to have over ~100K in Bitcoin they need to sell: once the majority of these coins are sold then we can anticipate such an event could mark the ultimate low and another rally provided that Bitcoin manages to survive. As indicated, a disaster scenario might involve this sort of selling pushing price below marginal production cost. The disaster scenario is basically primary users leaving or unloading due to the possible persistent selling effect MT GOX would have. This could push another crypto coin to dominant status. And, if the selling pressure forces Bitcoin below marginal production costs then miners might also lose incentive to mine. In other words, if such event were to happen it marks either the end of Bitcoin or the generational low. One way to weight which event is more likely is to monitor the price in relation to the marginal production cost: if the selling terminates with prices above marginal production costs or only dips below temporarily then Bitcoin would be more likely to survive. Ironically, if Bitcoin were to cease in this way then it might represent also the realization of another crypto as an actual currency because it might dampen any future investor sentiment. In other words, I think it is unlikely crypto could ever be viewed as a store of value if Bitcoin fails. However, this sort of event is unlikely to detract from using some other crypto as a currency. The technology is realized while the speculators and investors lose.

https://coinmarketcap.com/

Hey there, are you a hedge fund, research firm, independent trader, or quantamental investor that would be interested in premium and more detailed analysis similar to this with price levels, charts, and possible studies? Please shoot me an email and we can discuss possibilities. My focus markets are on S&P 500 and BTC with tertiary on other futures markets like CL.

None of the the above analysis should be construed as advice to sell or buy.

About the Author

Curtis is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline.

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